The compensation clause (clause 10) in the ADLS/REINZ form of Agreement for Sale and Purchase of Real Estate deals with compensation sought by either the purchaser or the vendor.
While most transactions proceed smoothly, once a claim under clause 10 is triggered, practitioners involved must deal with it quickly. Urgent decisions are required from clients and settlement will likely be delayed.
This article provides a summary of the timelines and key points under the latest sale and purchase agreement form (Eleventh Edition 2022 (3)). Clause 10 is complex and deals with the process for deciding the following:
- the person who will determine whether there is a valid claim;
- the interim amount to be retained while the claim is being assessed;
- the person who will determine the interim amount; and
- the stakeholder who will hold the interim amount.
Claim scenarios
Scenario 1: claims by purchaser
A purchaser can invoke clause 10 under several circumstances:
- vendor’s breach of any terms of the agreement;
- a misrepresentation;
- vendor’s breach of s 9 or s 14 of the Fair Trading Act 1986 (misleading and deceptive conduct); or
- an equitable set-off.
Scenario 2: claims by vendor or purchaser
Either the vendor or the purchaser can invoke clause 10 if the parties cannot agree on:
- the amount of damages/compensation due to a party after the other’s default on settlement, or
- the diminution in value of the property which is partially damaged.
A party can make a notice of claim under clause 10 on only one occasion but the claim can address multiple issues within the given circumstances.
For scenario 1, a purchaser must give the vendor notice of its claim under clause 10 no later than the last working day before the settlement date. That notice must include the following:
- the particular breach;
- a genuine pre-estimate of the loss suffered; and
- particulars of the claim which must be quantified to the extent reasonably possible as at the date of the notice.
If a claim is unable to be served on the due date because of the other party’s conduct or omission, there is provision to allow the notice of a claim to be served on or before the working day prior to the last date required for settlement under a settlement notice.
If the claim and the amount of compensation claimed is agreed, the matter will proceed and settlement can take place.
Dispute resolution
Claim disputes
If a purchaser makes a claim under scenario 1 and the vendor disputes that the purchaser has a valid or reasonably arguable claim, the vender must give notice to the purchaser within three working days of receiving the notice of claim.
If the vendor fails to give notice of its dispute within the set timeframe, the vendor is deemed to have accepted that the purchaser has a valid or reasonably arguable claim.
If the vendor gives notice that it disputes the purchaser’s right to claim, the matter will be determined by an experienced property lawyer or litigator to be agreed between the parties or appointed by the president of The Law Association Inc (formerly known as ADLS) if the parties cannot agree on the appointee.
This appointee’s costs will be paid by the party against whom the determination is made, or otherwise as determined by the appointee.
Quantum disputes
If the amount of compensation claimed is disputed, whether the claim is accepted or not, an interim amount is to be paid (by the party being claimed) to a stakeholder on settlement, pending determination of the compensation amount.
If the stakeholder cannot be agreed between the parties, he or she will be nominated by the president of the The Law Association Inc on application by either party to the president.
Interim amount
If the interim amount cannot be agreed, the amount will be determined by an experienced person such as an experienced property lawyer or litigator, or an experienced registered valuer or quantity surveyor where the claim relates to the diminution in value.
If the appointment of this person cannot be agreed, it will be appointed by the president of the The Law Association Inc on application by either party.
The costs of this appointee are to be paid equally by the vendor and the purchaser or otherwise determined by the appointee. The appointee may also make an order for a party to pay the other party’s reasonable legal costs.
Deferment of settlement date
If a determination is needed, the settlement date will be deferred to the second working day following the date on which the appointee gives notice of its determination to both parties.
If the parties dispute on both points – as to whether there is a valid claim and the quantum of the interim amount – the settlement date will be deferred to the second working day after notices of both determinations have been given to both parties.
Deferment of settlement date in ether situation is subject to the purchaser’s lawyer providing written confirmation that the purchaser is ready, willing and able to settle on the settlement date but for the resolution of the claim for compensation.
Final compensation amount
Clause 10 seems to be silent on the identity of the person making the determination on the final compensation amount. It is presumed the parties will agree that the person who determines the validity of the claim will also determine the final compensation amount. Alternatively, if the amount involved is substantial, the parties may need to proceed with court proceedings to have the compensation amount determined.
No quick fix
Given the process involved in the compensation clause, it is unlikely that the validity of the claim or the determination of the interim amount, if disputed, will be available quickly. Ultimately, both parties will suffer some loss in the process.
For example, the purchaser may be unable to take possession of the property, or the vendor might be unable to settle its own purchase and/or will need to continue with its mortgage payments until settlement takes place.
The lawyers for both parties will need to provide clear information about the process to their clients and may need to adopt a pragmatic approach.
Stella Chan is a partner at Forest Harrison and co-convener of The Law Association’s Property Law committee.
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